A Golden Opportunity for the Brave?

After a good start to 2012, global stock markets once again are being affected by economic uncertainty out of Europe; it is largely the same story as in 2010 and 2011.  The eventual outcome depends on a myriad of decisions made by politicians and central bankers globally.  We do know; with a degree of confidence that capital markets will survive and some believe that down the road this point in time will be seen as a golden opportunity for the brave.

 Negatives: Europe

There is no sugarcoating Europe right now. It has structural issues it is working through, and its fits and starts are translating to volatility on global stock markets. Greece is a very small economy on the world scale but its economic woes are undermining confidence in the European banking sector. Europe’s banks are exposed to the sovereign debt of nations such as Greece, Portugal and Spain; threats of losses on the banks’ portfolios create fear and uncertainty not only on the part of investors, but also on the part of depositors. In the end, Europe needs a structure in place to recapitalize the banks, similar to what the US did for its banking system in 2008/09. Until that is resolved, the pattern of minor crises followed by European Central Bank short-term fixes will continue to stir the headlines pot.

 Undecided: China

Economic growth slowed in April and May, the result of earlier interventions by the Chinese government to reduce speculation in the property sector. In early June, in response to this lower growth, China cut its interest rate for the first time since the 2008/2009 financial crisis. One way in which China’s economy differs from those of the US or Canada is the speed with which it can implement economic policy. This allows it to apply economic stimulus measures and see results more quickly. The 10% or greater annual growth that China has achieved over the past decade is unlikely to be duplicated over the next ten years. However, even if China’s growth moderates to 5-6% over the second half of this decade, that is on a much bigger base than China had in the early 2000’s. Therefore, a moderate growth scenario will grow global resources demand – a positive for Canada’s energy and mining sectors.

 Possible bright spot: United States

Lower commodity prices and low interest rates act as a stimulus to the US economy. Its corporate balance sheets are in good shape, corporate cash generation is still strong, and the housing market is making a gradual turn for the better. With market declines, equity valuations are broadly attractive. It has been said that corporations themselves are the biggest value investors, so companies with cash on their balance sheets can use times of market weakness to make acquisitions. This benefits high-quality, well-run companies as they can set the table for future growth.

I am always here to answer your questions and provide guidance, if you would like to discuss the impact of recent market events on your portfolio, give me a call.

 Have a great weekend,

Tracey

Source:  Mackenzie Financial